Spring fertilizer outlook

HIGH ENERGY prices that put the fertilizer market in the doldrums this fall and winter could result in spot shortages of nitrogen and phosphate fertilizers this spring.

That's the warning from fertilizer manufacturers and distributors. They are reacting to fertilizer bookings that all but evaporated as farmers and retailers decided to wait out what they hope will be only a temporary up-tick in nitrogen prices and, to a lesser extent, higher prices for phosphorus and potassium.

As a result, distributors have taken a buying vacation themselves. Manufacturers have curtailed production as well.

In essence, they've been scared away by natural gas prices that climbed above $15/mmBtu (million British thermal units) for February and March contracts, more than twice the price of mid-summer contracts. These winter contracts, already at historic highs at $10/mmBtu in early December, then climbed another 50% to the $15 mark. If farmers and the supply chain weren't already wary, this precipitous climb highlighted the risk of buying fertilizer when prices are volatile.

By the time you read this, it's possible that natural gas prices will have fallen and fertilizer will have started moving. But key players weren't holding their breaths early in the new year.

“The challenge is that we have a bit of a game of chicken going on,” says Bruce Vernon, director of crop nutrients marketing for Agriliance, the large supply cooperative. “Every day we delay ordering barges, railcars and trucks, we risk the chance of not physically getting the fertilizer there. It requires a well-coordinated supply chain. These disruptions can have a severe impact.”

Crying wolf?

The industry has heard warnings of shortages before. Price increases and volatility in recent years have slowed fall and early winter sales compared to historical patterns, yet shortages haven't occurred.

Last year, for instance, high prices stalled anhydrous sales into January. Following a big price correction, the market started to move. Spring supplies were adequate.

But this year could be different.

The risk of shortages is highest for anhydrous ammonia and phosphate fertilizers, according to Vernon and Mike Rahm, vice president for economic and market analysis for The Mosaic Company, a major phosphate fertilizer manufacturer formed in 2004 by the merger between Cargill Crop Nutrition and IMC Global. Manufacturers of both fertilizers have curtailed production this winter in light of high prices and low demand.

For example, in November, Mosaic announced that it was curtailing phosphate manufacturing operations in Florida and Louisiana and reducing potash production.

“There is a fair amount of tonnage to make up,” Rahm says. “Spot shortages of phosphate fertilizers in the Midwest aren't out of the question.”

Vernon has the same worries about anhydrous ammonia. Domestic anhydrous ammonia producers had cut production to 50 to 80% of capacity at year end because of high natural gas prices, he says.

“The anhydrous industry has the capacity to recover fairly rapidly if prices fall soon enough, but if they don't, I anticipate spot anhydrous outages in some markets for spring,” Vernon says.

Meanwhile, imported urea supplies should be adequate and should help take up the slack if anhydrous shortages develop. Says Vernon: “Will there be enough N? I think so. But it may be in a different form than farmers are accustomed to using.”

Of the three major nutrients, potash is in the best supply. “The potash pipeline is stocked pretty well,” Rahm says.

Katrina and Rita get the blame

Hurricanes Katrina and Rita get much of the blame for high natural gas prices, which have a direct impact on anhydrous ammonia prices. As of early winter, off-shore platforms in the Gulf of Mexico were estimated to be producing only 70% of the gas they supplied at the same time the previous year. A recent U.S Energy Department report estimated that natural gas supplies won't return to pre-hurricane capacity until sometime next summer.

The gas shortfall doesn't tell the entire story, however. Protective shutdowns of off-shore rigs and fertilizer plants before the hurricanes also reduced production of anhydrous and other fertilizers, including diammonium phosphate (DAP) and monoammonium phosphate (MAP). Transportation disruptions caused when the industry moved railcars, barges and trucks out of harm's way before the hurricanes struck also raised costs and reduced deliveries prior to the price run-up.

In total, these factors, when coupled with winter natural gas demand for heating, were a recipe for volatility.

Volatility and buying resistance

All industry segments, from manufacturers to distributors, retailers and growers, are caught in a dilemma resulting from this price volatility. Everyone fears that buying anhydrous and other fertilizers affected by high natural gas prices will result in financial disaster when prices fall, as typically occurs when the heating season winds down.

The farm-level price implied by $12/mmBtu helps spell out the dilemma. At that price, the cost of manufacturing anhydrous ammonia is about $425/ton. With transportation costs and distributor and dealer markups, the Iowa grower price would be in the $545/ton range.

By comparison, USDA estimates show that U.S. farmers paid an average of $429/ton for anhydrous ammonia this past April, says Rahm of Mosaic.

“I don't think any tons will be sold at that number,” says Vernon of Agriliance. “At these prices, I am not inclined to put anhydrous ammonia into the terminal in hope it can be sold profitably next spring. This volatility presents a tremendous risk.”

Decisions to purchase phosphate fertilizer pose the same dilemma, although prices haven't been as volatile because DAP and MAP require less natural gas to manufacture than does anhydrous ammonia.

Spring fertilizer use

Although there is a near certainty that fertilizer prices will fall once the heating season passes, just how far they will fall remains unclear.

A report recently published by Mosaic (available at www.mosaicco.com) uses current wholesale terminal prices to project spring retail prices. It puts anhydrous at $550/ton in Iowa, up 28% from $429/ton the previous year. Prices were projected at $330/ton for DAP, up about 8%, and $270/ton for muriate of potash (MOP), up 12%.

At those prices, fertilizer costs for corn production would be up 19% overall from a year ago. That's an increase of $11/acre, or $0.07/bu. on 170 bu./acre corn. By comparison, fertilizer costs for soybean production in Iowa were projected to be up 10%, or $3.00/acre. That's $0.06/bu. on 50 bu./acre beans.

Although fertilizer price sticker shock is likely to be significant come spring, Rahm says growers are unlikely to substantially reduce the amount of fertilizer they apply to corn and soybeans. He notes that even at higher prices, maximum economic yield calculations support near-normal fertilizer applications.

He says the biggest impact on overall fertilizer use is likely to be determined by the number of acres switched from corn to soybeans.

“We think the demand for fertilizer is inelastic,” Rahm says. “We expect that demand will snap back for the spring season. Farmers may grow more soybeans and reduce fertilizer rates slightly, but we don't see draconian changes.”